Arnott Says U.S. Stocks are “Dead Money”

The founder and CEO of Research Affiliates argues that investors should load up on emerging market  stocks and sell off overpriced U.S. equities, according to a recent Barron’s article.

In a recent interview, Arnott shared his insights on the subject:

Should an investor make emerging markets a larger part of their portfolio? It depends on their level of risk tolerance, Arnott says. For instance, if an investor becomes “panicky” if share price gains are not immediate, then maybe not. “If you aren’t panicky,” says Arnott, “then I would be [disinclined] to own U.S. equities now.”

On predicting performance of emerging markets, Arnott comments, “You know, it’s almost impossible to forecast returns over the next year, but it’s surprisingly easy to do it over a longer time period, like 10 years.” He explains that equity price changes are much more random in the short term, but over time become less important relative to yield growth.

On the role of active management over the next 25 years, Arnott says it will be a minority player down the road, but doesn’t think it will be non-existent.

At the moment, Arnott says, value stocks outside the U.S. and quality stocks inside the U.S. are both trading cheaply. Regarding the strong performance of and stretched valuations in the U.S. market over the past year, Arnott says, “I look at this as a wonderful time to be an active investor if you are willing to take maverick risk.”